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IRS rules $720M in NH bonds taxable in dispute over accounting rules

By DAVE SOLOMONNew Hampshire Union Leader

CONCORD — The state agency that sells bonds to finance education and health care in New Hampshire decided last summer to forego a voluntary settlement with the IRS over an accounting dispute, and take its chances on an audit.

IRS examiners issued their decision on Dec. 11, and determined that $720 million of bonds issued by the New Hampshire Health and Education Facilities Authority from 1998 to 2011 should not have been tax-exempt.

An attorney representing the state agency said the ruling was expected, and that the matter will now go before the IRS Appeals Office.

"We understood that it was unlikely we would be able to resolve the dispute over the tax-exempt bonds, that the IRS examiners would issue this determination, and that we would then take the case to appeals," said Bradley Waterman, a Washington, D.C.-based attorney representing the agency.

The New Hampshire Higher Education Loan Corp. could have to pay millions of dollars to settle the dispute on behalf of bond investors who theoretically should have been paying taxes on the interest they earned from the bonds at issue.

The Pennsylvania Higher Education Assistance Agency recently paid $12.3 million to resolve similar IRS allegations in connection with $250 million in student loan bonds, as part of a voluntary settlement.

"Our exposure is nowhere near the amount that Pennsylvania paid," said Waterman. "It should be a modest amount of money, if any money is part of the settlement."

The dispute is being followed closely in the tax-exempt bond market, since New Hampshire is the first state to refuse to settle voluntarily with the IRS, and take its case to appeals. Most of the bonds at issue have been paid off, and the federal government took over the guaranteed student loan program in 2010.

"This will not in any way impair the ability of the state or the state's agencies to issue bonds at favorable rates," Waterman said. "It's inside baseball."

The dispute revolves around what is known in the bond industry as "loan swapping," in which student loans were allocated to bonds other than the ones used to finance them.

The IRS and the state agency were close to an agreement, but the IRS insisted that the agency admit it ran afoul of accounting rules. "The requirement that the corporation admit that it acted improperly was unacceptable," Waterman said.